The Essence of Limited Liability Companies (LLCs / Sàrls)

A limited liability company, or Société à responsabilité limitée (Sàrl) in Switzerland, is a distinct legal entity formed by one or more individuals who contribute a minimum capital of CHF 20,000 in exchange for ownership shares. The formation of an LLC requires an authentic act overseen by a notary, establishing the company as a separate legal entity from its owners.

Key characteristics of LLCs:

1. Limited liability protection: One of the primary advantages of an LLC is the limitation of personal liability. Each member's liability is restricted to their share capital contribution and the terms outlined in the member agreement. This separation of personal and business assets provides a layer of protection for the owners' personal wealth.

2. Mandatory registration: To establish an LLC as a legal entity, registration in the Swiss commercial register is compulsory. This process formalizes the company's existence and makes its information publicly accessible.

3. Formal accounting requirements: LLCs are obligated to maintain comprehensive accounting records, including a balance sheet and income statement, in accordance with Swiss accounting standards. This necessitates a more rigorous approach to financial management compared to sole proprietorships.

4. Profit and loss allocation: At the end of each fiscal year, the members of an LLC must determine how to distribute profits or address losses. This decision-making process is guided by the member agreement and Swiss legal requirements.

5. Legal governance: LLCs in Switzerland are subject to the provisions outlined in the Swiss Code of Obligations (Part 3) and the Federal Direct Tax Act. Adherence to these legal frameworks is essential to ensure compliance and avoid penalties.

The Freelancer's Path: Sole Proprietorships

For freelancers in Switzerland seeking flexibility and simplicity, a sole proprietorship (entreprise individuelle or raison individuelle) is often the preferred choice. This business structure allows individuals to operate independently, maintaining full control over their professional activities.

Key aspects of sole proprietorships:

1. Swift and straightforward setup: Launching a sole proprietorship is a streamlined process. Once you start invoicing two or more clients, you can officially commence your business activities. Initially, there is no requirement to register with the commercial register, although this becomes necessary if your annual revenue surpasses CHF 100,000.

2. Social security obligations: As a sole proprietor, you must register with the AVS (Swiss social security system) and contribute to your retirement benefits once your revenue exceeds CHF 2,300. These contributions ensure your eligibility for social security benefits in the future.

3. Unlimited personal liability: One significant consideration for sole proprietors is the absence of distinction between personal and business assets. As an individual, you bear full responsibility for any debts or liabilities incurred by your business. This unlimited liability can pose risks to your personal financial well-being.

4. Simplified accounting: Sole proprietorships benefit from less complex accounting requirements compared to LLCs. Tracking income and expenses is sufficient, without the need for elaborate financial statements. However, as your business grows, more comprehensive bookkeeping practices may become necessary.

Comparing Sole Proprietorships and LLCs: A Freelancer's Perspective

To illustrate the practical differences between sole proprietorships and LLCs, let's follow the journeys of two freelancers: Dominique, who opts for an LLC, and Chiara, who chooses the sole proprietorship route.

1. The startup phase: Dominique's LLC requires registration in the commercial register before commencing operations, a process that involves certain costs and administrative tasks. On the other hand, Chiara can dive straight into her freelance work, incurring only the necessary expenses for business tools and equipment.

2. Legal identity: Dominique's LLC stands as a separate legal entity, distinct from his personal identity. In contrast, Chiara's sole proprietorship is intrinsically linked to her as an individual, blurring the line between personal and professional spheres.

3. Income and remuneration: As an LLC owner, Dominique will receive a salary from his company, while any additional profits can be distributed as dividends. Chiara, as a sole proprietor, will make direct withdrawals from her business bank account to cover personal expenses.

4. Tax implications: LLCs face a form of "double taxation" in Switzerland. The LLC itself is subject to corporate taxes on its profits, and then Dominique, as an owner, must pay personal income tax on his salary and any dividends received. Chiara's sole proprietorship profits are taxed solely as personal income, avoiding this double taxation scenario.

5. Liability concerns: Dominique's personal liability is limited to his share capital investment in the LLC, providing a degree of protection for his personal assets. Chiara, however, faces unlimited personal liability, meaning her personal assets could be at risk in case of business debts or legal disputes.

Additional Factors to Consider

Beyond the fundamental differences between sole proprietorships and LLCs, freelancers should weigh additional factors when deciding on the optimal legal structure for their business:

1. Partnership potential: LLCs offer a straightforward mechanism for bringing in partners or investors by issuing shares. This can be advantageous for freelancers seeking to collaborate or scale their business. Sole proprietorships, being tied to a single individual, do not provide the same flexibility for partnerships.

2. Unemployment benefits eligibility: It's important to note that both LLC owners and sole proprietors generally do not qualify for unemployment benefits if their business encounters difficulties. The Swiss authorities consider these individuals responsible for their own employment status. Freelancers should explore alternative means of creating a financial safety net, such as private insurance or savings.

3. Administrative burden and costs: LLCs typically involve higher management and compliance costs compared to sole proprietorships. From organizing shareholder meetings to fulfilling reporting requirements, the administrative workload can be substantial. Sole proprietorships offer a more streamlined and cost-effective approach to business management.

4. Privacy considerations: When registering an LLC in the Swiss commercial register, certain information becomes publicly accessible, including owner names, company statutes, and capital amounts. Sole proprietorships, especially those below the CHF 100,000 annual revenue threshold, can maintain a higher level of privacy regarding their business details.